Climate-aware investing: employers urged to better communicate how pensions are invested
So, although the headlines may still be predominately centred on Covid-19, it’s hard to get away from the climate-shaped elephant in the room.
Fortunately though, we see more people now willing to talk about the sometimes uncomfortable truth that significant changes across society and business are needed, and there is a growing acceptance that we can all – in a big or small way – play our part in helping address the issue.
The pension industry is no different, and the Pensions and Lifetime Savings Association (PLSA) continues to play a key role in facilitating those conversations, sharing best practice and finding solutions to the tough questions.
This was a key factor for our Changing Climate report – published last year – which drew on our discussions with more than 80 pension industry representatives and demonstrated the near universal desire among pension funds to invest in a climate-aware way.
In our research we also identified seven barriers the industry faces and the ways the PLSA is helping them to overcome these constraints. We’ve been pleased to see positive steps from government and regulators to address many of these constraints in recent months.
1. Clarifying definitions of climate-aware investment
The PLSA recommends a joint-industry/government review to examine the wide range of competing standards and definitions that currently exist. This should include any initiatives already underway to achieve harmonisation, and identify a framework to achieve a common language and taxonomy ahead of the 26th UN Climate Change Conference of the Parties (COP26) taking place in November.
2. Addressing poor-quality climate data and information
The PLSA will encourage the government and regulators to move towards more widespread adoption of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, and support measures to increase equivalence of climate reporting or regulatory obligations from the top to the bottom of the investment chain.
3. Delivering greater climate expertise and education
The PLSA will encourage more industry-led environmental, social and governance (ESG) training and education; work with The Pensions Regulator (TPR) to ensure guidance for schemes is suitable; and support the Financial Conduct Authority (FCA) in working to design explicit climate conduct expectations.
4. Articulating requirements more explicitly
The PLSA will work with the International Corporate Governance Network (ICGN) in revising and renewing its Model Mandate and produce guidance, templates and best practice material for members and trustees.
5. Enabling better climate stewardship
The PLSA will further develop its guidance for members on what good practice expectations ought to be with regard to stewardship services, and continue to encourage schemes and managers to adopt the Stewardship Code, and to play a pro-active role in industry Stewardship groups. It also commits to working with the investment industry and regulators to find solutions to the challenges schemes face when exercising stewardship and voting ‘rights’ in pooled funds.
6. Improving supply of appropriate climate ‘products’
The PLSA will continue to make the case for the issuance of a Green Gilt by the UK government, and will work with the investment industry and regulators to develop principles for ESG asset management funds/products to adhere to on ESG generally, or specifically with regard to climate.
7. Communicating and explaining climate-aware investment
The PLSA will explore the feasibility of creating a Pension Quality Mark for ESG and build on our work on implementation statements to consider how best to support members in their communications with beneficiaries.
That last point about communication remains key. It’s clear that, given the scale of the issue, businesses, investment managers and pension funds will be expected to do more to demonstrate the impact they are having. This will range from proving that their operations are not damaging the environment, to showing that pension contributions are ‘doing good’ through their words and actions.
The importance of climate-aware investing to savers is huge. Of more than 2,000 UK adults surveyed by the PLSA, 83% think global warming will be a serious problem for the UK if action is not taken and, currently, there is a lack of awareness about the extent to which pension funds are working to reduce the impact of climate change.
In the same survey, 80% replied that global warming is an important issue to them and around half said it is “extremely” or “very” important to them.
It’s therefore important that employers better communicate to their employees about how they are investing their money in a climate-aware manner.
Communication will take shape in many different ways including clear, concise member updates on where they are investing, the impact of their stewardship activities, as well as making investments in greener, cleaner projects taking place across the globe.
Engaging with people not only demonstrates to employees that the contributions a business or pension fund make on their behalf are ‘doing good’, but also encourages them to engage with more with their pension.
By telling that story we are helping ensure climate-aware investing remains at the heart of good business practice.
The author is Joe Dabrowski, deputy director of policy at PLSA.
This article is provided by PLSA.